Supply safety inventories

The only way to avoid this is by strict analysis of the supply chain from the customer order to final product delivery. Definition of the optimized (theoretical) process and sequential work towards a high service level approach allow the identification of gaps, and of opportunities which might not always be the cheapest (ship versus train versus plane) but could be the most effective way to reduce capital costs and shorten planning scope - an important aspect, especially in volatile customer markets with long production processes on the (chemical) supplier side. As in the case of CIP, this needs clear parameters, KPIs, commitment from all players, and regular tracking. The most important parameters are the lead time for all products, optimal lot sizes, replenishment points, and safety inventories. 

Note also that the last example in the chapter essentially entails determining the placement of safety inventory in the supply chain (since the reorder point specifies inventory carried over and above the level required to meet expected demand over the replenishment lead time), albeit a simple, serial supply chain. Magnanti et al. (2006) present a general formulation of fhis problem, specifically a non-linear optimization formulation subject to linear constraints, to solve for the optimal placement of safety stocks in a general supply chain network. Magnanti et al. actually generalize the problem... 

Although the integer policies discussed above synchronize replenishment within the supply chain and decrease cycle inventories, they increase safety inventories, because of the lack of flexibility with the timing of a reorder, as discussed in Chapter 12. Thus, these polices make the most sense for supply chains in which cycle inventories are large and demand is relatively predictable. 

Understand the role of safety inventory in a supply chain. 

In this chapter, we discuss how safety inventory can help a supply chain improve product availability in the presence of supply and demand variability. We discuss various measures of product availability and how managers can set safety inventory levels to provide the desired product availability. We also explore what managers can do to reduce the amount of safety inventory required while maintaining or even improving product availability. 

Chapter 12 Managing Uncertainty in a Supply Chain Safety Inventory 315... 

As product variety has grown, however, product life cycles have shmnk. Thus, it is more likely that a product that is hof today will be obsolete tomorrow, which increases the cost to firms of carrying too much inventory. Thus, a key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability. 

For any supply chain, three key questions need to be considered when planning safety inventory ... 

As the uncertainty of supply or demand grows, the required level of safety inventories increases. Demand for milk at a supermarket is quite predictable. As a result, supermarkets can operate with low levels of safety inventory relative to demand. In contrast, d and for spices at the same supermarket is much harder to predict. Thus the supermarket needs to carry high levels of safety inventory for spices relative to d and. Whereas most of the milk inventory at a supermarket is cycle inventory (with very little being safety inventory), most of the spice inventory is safety inventory carried to deal with uncertainty of demand. 

Assume that weekly demand for phones at B M Office Supplies is normally distributed, with a mean of 2,500 and a standard deviation of 500. The manufacturer takes two weeks to fill an order placed by the B M manager. The store manager currentiy orders 10,000 phones when the inventory on hand drops to 6,000. Evaluate the safety inventory and the average inventory carried by B M. Also evaluate the average time a phone spends at B M. 

As the desired product availability goes up, the required safety inventory also increases because the supply chain must now be able to accommodate uncommonly high demand or uncommonly low supply. For the Walmart situation in Example 12-5, we evaluate the required safety inventory for varying levels of fill rate as shown in Table 12-1. 

A goal of any supply chain manager is to reduce the level of safety inventory required in a way that does not adversely affect product availabihty. The previous discussion highlights two key managerial levers that may be used to achieve this goal ... 

In this section, we incorporate supply uncertainty by assuming that lead time is uncertain and identify the impact of lead time uncertainty on safety inventories. Assume that the customer demand per period for tablets at Amazon and the replenishment lead time from the supplier are normally distributed. We are provided the following inputs ... 

The preceding example emphasizes the impact of lead lime variability on safety inventory requirements (and thus material flow time) and the large potential benefits from reducing lead time variability or improving on-time deliveries. Often, safety inventory calculations in practice do not include any measure of supply uncertainty, resulting in levels that may be lower than required. This hurts product availability. 

A reduction in supply uncertainty can help to dramatically reduce the required safety inventory without hurting product avaUabihty. 

Next, we discuss how aggregation can help reduce the amount of safety inventory in the supply chain. 

Example 12-9 and the previous discussion highlight instances in which physical aggregation of inventory at one location may not be optimal. However, aggregating safety inventory has clear benefits. We now discuss various methods by which a supply chain can extract the benefits of aggregation without having to physically centralize all inventories in one location. 

Weekly demand for cleaner at each store is normally distributed, with a mean of 1,000 and a standard deviation of 100. Demand experienced by each store is independent, and supply lead time for both motors and cleaner is four weeks. W. W. Grainger has a holding cost of 25 percent. For each of the two products, evaluate the reduction in safety inventories that will result if they are removed from retail stores and carried only in a centralized DC. Assume a desired CSL of 0.95. 

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